A contract dispute led Terra Lycos to drop paper on Pasadena, Calif.-based Overture, recently acquired by Terra Lycos competitor Yahoo! In a complaint filed in Massachusetts federal court on October 17, Terra Lycos said that Overture breached the terms of its services agreement because it didn't obtain Waltham, Mass.-based Lycos' consent before being acquired by Yahoo, the third most highly-trafficked Internet site in September, according to comScore Media Metrix. Media Metrix put Terra Lycos in sixth place with less than half Yahoo!'s traffic.

According to the complaint, "Lycos bargained for, and Overture agreed to, confidentiality and anti-assignment provisions which required Overture to seek and obtain Terra Lycos's consent before an assignment of the Agreement" -- especially if an acquirer was a Lycos competitor. Moreover, Yahoo! was number one on a list of such competitors attached to the agreement.

The suit claims that Yahoo!'s oversight of the relationship "leaves Lycos in an untenable position by which it is dependent on a major competitor for an essential service," Lycos said in the complaint. "Overture will inevitably disclose Lycos' confidential and trade secret information to Yahoo, and indeed, on information and belief, Overture has already done so." Oh and, by the way, Overture also owes Lycos more than $800,000, so pay up!

Overture representatives didn't return calls asking for comment, but the company has reportedly not received a copy of the complaint. Lycos lead attorney Randall W. Bodner of the Boston firm Ropes & Gray LLP told IAR that he couldn't disclose when Overture might be served, saying only, "Every lawsuit is different."

According to Lycos' complaint, on September 25 Overture sent Lycos a letter saying "{u}nder the transaction [with Yahoo], there will be no assignment of the agreement." Central to Lycos' suit is that Overture did too assign the agreement by being acquired.

The Lycos suit isn't the first fallout over the Overture/Yahoo! coupling. In August, top German Internet service provider and portal T-Online switched both Web search and paid listings from Overture to Google because of the Yahoo! acquisition. T-Online invoked a contract clause that it claimed allowed it an out in the event of a change of control -- like Overture's agreement earlier this summer to be bought by Yahoo!. T-Online said it considers Yahoo! a direct competitor, while Google only competes with it in search. But in September, the court ruled that T-Online had to honor the contract.

Overture can live without Lycos, said Jupiter Research analyst Nate Elliott. "It's a big relationship, but neither is entirely dependent on the other." While it no doubt hurts Overture to see Lycos get in bed with arch-rival Google, "Overture and Yahoo! have to feel good that MSN re-upped their contract," he said. "That's a major source of revenue for Overture." When the Yahoo! acquisition of Overture was originally announced, the companies said they felt confident they could maintain Overture's distribution network, but maintained the deal would be a financial success even if they lost partners.

Overture can feel secure with Yahoo! and MSN, Elliott said. "By far, Overture's biggest distribution points are Yahoo! and MSN. And there are still tons and tons of smaller sites that won't have a problem with the fact that it's owned by Yahoo!"

Terra Lycos has recently been developing a relationship with Google. Google has provided contextual ads for its sites in Europe, and in the U.S. . The relationship with Overture stretches back to September 2001, when the paid search company was known as GoTo.com. The parties amended the agreement in April of 2003, when Lycos added the No-Yahoo! provision.